I have been slowly working on a new project. My goal this year is to read the 10-K’s for all businesses where I have invested at least 1% or more of my investable capital. My project is inspired by David Kretzmann’s (TMFPencils) 10K write-ups for his Analyst Development Program projects. Here’s a link to David’s recent 10-K writeup for Rocket Fuel Inc:
With that background out of the way, below are my notes on AMBA. Notes are based on 10-K, as well as recent quarterly earnings release. Sharing it will the Foolish community for comments and feedback. Hopefully, someone will find it useful.
Company, industry, sector
AMBA is a leading developer of low-power video processing system-on-a-chip (SoC) solutions that integrate HD video processing, image processing, audio processing functions onto a single chip. AMBA combines processor design capabilities with video & image processing expertise, including proprietary algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development.
AMBA addresses the following markets
- camera market, more specifically the wearable sports cameras (GOPRO), automotive aftermarket cameras,
security cameras, telepresence cameras, and camcorders
- infrastructure market, where they provide solutions for efficient management of IP video traffic, broadcast encoding and transcoding and IP video delivery applications
In past 3 years, the camera market has been the main revenue driver.
AMBA sells its solution to OEMs who source AMBA’s solutions via ODMs. Leading OEMs including Avigilon Corporation, Axis Communications AB, Dahua Technology Co., Ltd., DropCam, Inc., GoPro Inc., Hikvision Digital Technology Co., and Robert Bosch GmbH and affiliated entities use AMBA’s SoC solutions.
Several tailwinds impacting demand for AMBA’s solutions
- Growth in the # of video capture devices: smartphones, tablets, wearable cameras, automotive aftermarket cameras, IP security cameras and telepresence cameras are increasingly including both HD video capture and high-quality still image capture; useful for law enforcement, insurance, etc
- Growing User-generated content volumes (e.g., Facebook, YouTube etc)
- Advances in display technologies: consumers continue to expect increasingly higher quality video images (e.g., 4K videos)
- Need for video compression technologies: Uncompressed video requires large amounts of storage space, so compression is a necessity as we move towards HD and Super HD videos. In broadcast television, the upgrade of networks to the
new High Efficiency Video Coding, or HEVC, video compression technology will support the transition of consumers to 4K video.
In consumer cameras, the efficiency of the encoding has a significant impact on video quality, recording time and battery life.
Company strategy and advantages
Fabless manufacturing strategy; majority of the 495 employees in R&D. Majority of the solutions are in the 65, 45 and 32 nanometer (nm) process nodes.
AMBA SoC solutions have functionalities such as simultaneous video and image capture, multiple-stream video capture and wireless connectivity. The SoC has low power requirements, support rugged, and small form factor design. AMBA’s solutions enable a new class of transcoders that can simultaneously encode and stream multiple video formats to different end devices and can change video resolution and transmission rates based on available bandwidth and the display capability of receiving devices
What are AMBA’s key competitive advantages?
- High-Performance, Low Power Video and Image Processing Algorithm Expertise
- High performance image capture of up to 30 16-megapixel still images per second.
- Clear images in low light conditions with 3D Motion Compensated Temporal Filtering (MCTF) technology
- Wide Dynamic Range (WDR) and High Dynamic Range (HDR) processing capabilities that provide greater dynamic range between the lightest and darkest areas of an image, permitting captured still images to reveal details that would otherwise be lost against a bright background.
- Advanced de-warping capability enables cameras to use wide angle lenses to capture images from a wide
area, making it ideal for a variety of IP security camera applications.
- Video processing architecture
- AMBA’s video processing architecture is designed to efficiently integrate advanced compression algorithms into SoCs to offer exceptional storage and transmission efficiencies at lower power across multiple products and end markets.
Scalable SoC-based solutions
Traditional solutions have generally relied upon significant customisation to meet the specific requirements of each market, resulting in longer design cycles and higher development costs. A customisable SoC solution reduces design cycle time and development costs. AMBA has extensive system integration expertise enables integration of core video processing functionality with many peripheral functions such as multiple inputs and outputs, lens controllers, flash controllers and remote control interfaces to reduce system complexity and interoperability issues. AMBA has continually developed smaller, yet more powerful SoC solutions, which helps in the face of small form factor demand.
Comprehensive & flexible software - this is effectively highly customisable middleware that can easily be integrated by OEMs
Relationships with leading OEMs and ODMs
Current product lines
The global semiconductor market and the video and image processing markets are highly competitive. AMBA expects competition to increase and intensify as more players enter and try to tap into AMBA’s primary markets. Increased competition can result in pricing pressures and margin erosion.
Competitors in the wearable sports and IP security camera markets include Fujitsu Limited, HiSilicon Technologies Co., Ltd., Geo Semiconductor, Inc. and Texas Instruments Incorporated, as well as vertically integrated divisions of consumer device OEMs, including Canon Inc., Panasonic Corporation and Sony Corporation.
Competitors in the automotive aftermarket camera market include Alpha Imaging Technology Corp., Core Logic, Inc., Novatek Microelectronics Corp. and Sunplus Technology Co. Ltd.
Competitors in the infrastructure market include Intel Corporation, Magnum Semiconductor, Inc. and Texas Instruments Incorporated.
Some of AMBA’s customers and suppliers also have divisions that produce competing products.
Potential new competitors include Broadcom Corporation, NVIDIA Corporation, Qualcomm Incorporated and Samsung.
Dependent on OEMs product successes
Limited number of customers (OEMs) driving revenues
Lack of growth in the target markets
Cyclic nature of the semi-conductor business. Also the average selling prices of video/image processing solutions decrease over time, impacting revenue growth and margins. Watch for revenue expansion and margin remaining more or less flat but not declining. This is in my mind the biggest area of concern.
As of January 31, 2014, AMBA’s executive officers, directors, and their affiliates beneficially own, in the aggregate, approximately 8.7% of AMBA’s ordinary shares. That’s a pretty reasonable vote of confidence in AMBA’s future prospects!
Earnings, growth, and valuation notes
Dollar figures in thousands, expect for per share data
Diluted share count: 30,172,563
Gross profit: $99,847
Net income: $25,654
GAAP EPS (diluted): $0.85
Non-GAAP EPS (diluted): $1.10
Diluted share count: 31,831,489
Revenue: $157,608 - $71,651 + $87,889 = $173, 846
Gross profit: $99,847 - $44,984 + $56,132 = $110, 995
Net income: $25,654 - $10,995 + $14,570 = $29,229
GAAP EPS (diluted): $0.85 - $0.37 + $0.46 = $0.94
Non-GAAP EPS (diluted): $1.10 - $0.47 + $0.62 = $1.25
On a non-GAAP basis, trailing PE is $41.79/$1.25 = 33.4
Q3 2014 non-GAAP eps was $0.37
Q4 2014 non-GAAP eps was $0.26
Based on 8 estimates, Q3 2015 is expected to be $0.54 and Q4 2015 is expected to be $0.34.
Expected trailing non-GAAP eps is $1.25 + $0.54 + $.34 - $0.37 - $0.26 = $1.50
PE on the basis of forward estimates year-end 2015 = 27.9, so its not that expensive when we look two quarters ahead.
Also, let’s look at FY 14 and compare with estimates for FY 15 and FY 16.
---------------------------------------------------------------------- non-GAAP EPS YoY growth ---------------------------------------------------------------------- FY14 $1.10 FY15 (estimate) $1.50 36% FY16 (estimate) $1.70 13% ----------------------------------------------------------------------
Right now, analysts seem to not be modelling much growth b/w FY15 and FY16, assuming my estimate numbers are indeed what the analysts have and are for non-GAAP numbers … But b/w FY14 and FY15 the growth rate in earnings is at a clip of 36%, which is very good.
The semiconductor industry is highly competitive. AMBA has fended competition well by being in the leading edge of the technology curve. Maintaining this competitive advantage is very important as otherwise there will be serious margin erosion. So far, it appears AMBA is making all the right moves. AMBA has a 4K (Ultra HD) SoC out, and its reasonable to expect that a large majority of its end market (consumer camera, professional videography, security, automotive) will move towards 4K Ultra HD videos. The usual drivers are already present - massive consumer platforms for sharing user-generated content (e.g., Facebook, YouTube), demand for small form factors, trends towards wearable devices, insurance telematics applications, digital security applications, availability of UHD capable TVs etc. Finally, it’s possible that as the chips become smaller, faster, and smarter, the eventual power demand of these SoCs will decrease enough to allow it to be run easily on a smartphone. As the race for making smartphones do more and more, and with competitors looking to find differentiating factors, this is an area that could actually takeoff. If it happens, that would open an entirely new , more main stream area, and propel AMBA into an even stronger growth story.